Revenue for the first three quarters increased 7% year over year, and profitability increased. In the first three quarters of 2024, the company achieved revenue of 17.081 billion yuan (YoY +7.38%), net profit of 0.553 billion yuan, net profit of 0.553 billion yuan after deducting non-return net profit of 0.541 billion yuan, turning a year-on-year loss into a profit, and the net interest rate increased by 4.1 pct to 3.66% year on year. Among them, 3Q24 achieved revenue of 6.001 billion yuan (YoY +0.04%, QoQ +3.50%), net profit of 2.30 yuan (YoY +85%, QoQ +2.53%), net profit of 0.225 billion yuan (YoY +121%, QoQ +1.35%), and a net interest rate of 4.33% (YoY +2.03pct, QoQ +0.02pct).

Gross margin increased year-on-year and declined in the third quarter. The company's gross margin for the first three quarters of 2024 was 14.33%, up 3.05 pct from the same period last year. Of these, 3Q24 gross margin was 14.64%, up 1.93 pct year on year, and down 1.35 ct from month to month. In terms of period expenses, R&D expenses increased 10.95% year on year to 0.957 billion yuan in the first three quarters, R&D rates increased 0.18 pct to 5.60% year over year; management rates decreased 0.14 pct to 2.14% year over year, sales rates increased 0.01 pct to 0.30% year over year, and financial rates decreased by 2.44 pct to 2.20% year on year. Among them, the 3Q24 R&D rate increased year on year, decreased month on month, management rate increased month on month, sales rate remained close to flat year on month, financial rate decreased year on month and month over month. The total four rates increased 0.18 pct year over year, and decreased 0.68 pct month over month.

The Tongfu Tongke Memory Phase II project successfully expanded production. After the expansion of production, 0.15 million wafers can be supplied as a whole. On September 20, 2024, Tongfu Tongke, a subsidiary of the company, held the first equipment entry ceremony for the second phase of the Memory project, marking that Tongfu Microelectronics has achieved phased results in the construction of a memory sealing and testing base in the Shibei High-tech Zone, which will form a leading level of memory sealing and testing at the technical level. The second phase of the Memory project added a purification workshop of 8,000 square meters, which can provide 0.15 million wafers per month as a whole after production expansion; the additional 0.16 billion yuan equipment investment is mainly the key equipment required for mass production of high-end products such as embedded FCCSP and uPOP, which can better meet the localization needs of high-end memory products in the fields of mobile phones, solid-state drives, servers, etc.

Indirectly holds shares in lead frame supplier AAMI. The company invested 0.2 billion yuan to transfer Chuzhou Guangtai's shares held by leading semiconductors and indirectly held shares in lead frame supplier AAMI, further improving the stability and safety of the company's supply chain. Currently, Zhizheng Co., Ltd. plans to issue shares to the company to acquire this share. After the transaction is completed, the company will directly hold Zhizheng shares and indirectly hold AAMI shares.

Investment advice: Benefiting from the localization of the semiconductor chain and maintaining the “superior to market” rating. Since the recovery in downstream demand for game consoles etc. is still weak, we lowered the company's net profit to the mother in 2024-2026 to 0.89/1.211/1.552 billion yuan (previous value was 0.984/1.315/1.591 billion yuan), and the PE corresponding to the stock price on October 30, 2024 was 42/31/24x. The company benefits from the localization of the semiconductor supply chain and maintains a “superior to the market” rating.

Risk warning: New product development falls short of expectations; demand falls short of expectations; risk of concentration of major customers.